Assignment GST & PPT taxes – Questions & Answers

Monday, August 28th, 2006

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INDUSTRY UPDATE

Bottom line is that there is a rebate of 36% of the GST for properties up to $350,000 whether it is owner occupied or rented. The rebate reduces as the purchase increases and there is no rebate on properties over $450,000. The rebate is available for both owner occupied and tenant occupied properties (rental rebate is not available if owner is entitled to claim an input tax credit which means the developer who rents units is not entitled to the rebate). To claim the rental rebate the owner must have entered into a lease agreement.

The “transitional rebate” applies to transactions where the contract was entered into prior to May 3, 2006. In this situation you pay the 7% on closing and then claim the 1% rebate. Most developer will allow you to claim the new housing rebate as part of closing, that is you only pay the “net” GST but they require payment based on 7% less rebate and the buyer claims the transitional rebate after closing. If you are leasing the developer will require payment of the full GST and the owner then claims the rebate directly.

Quiz Time: I have written an assignment agreement on an existing new development contract. The contract price with the developer is $500,000.00 + GST and the assignment price is $700,000. On which price does my client (the assignee) pay GST? On which price is the Property Transfer Tax payable on?

The price on which GST is payable is the original price on the contract between the developer and the buyer who is now the assignor (the person who is assigning the contract). So in this case GST would be paid on the $500,000. The GST department is aware of this but have not to date addressed it with any changes. This was confirmed to me by Richard Bell, Bell Alliance one of today’s meeting sponsors. Our BC government was more on top of the revenue opportunity and they changed the rules so that they now apply PTT (Property Transfer Tax) to the price on the assignment contract which in this case is $700,000. That means the Assignee (the person taking over the contract from the Assignor) will pay PTT on $200,000.00 more than would have been paid on the original contract of $500,000. It is very important as the licensee in these contracts that you make the buyer fully aware of the GST and PST considerations. They should confirm the exact amounts with their conveying Notary or Lawyer. To be wrong in this area can have some rather serious consequences to the licensee should a complaint arise. We also advise that you leave the calculations to the clients Notary/Lawyer as this is a part of their closing duties; to calculate, collect and submit both of these taxes to the BC and Federal revenue agencies. The duty of the licensee is to make the client aware of the applicable taxes and then point them to the qualified third party for the details before they remove their subjects.

With regards to the release of the Assignment Amount to the Assignor here is a brief explanation of the three options available:

Option A – Protects the Assignee the most. The funds stay in trust until the project is complete. Commission is payable on completion.

Option B – Protects the Assignor. Once the deal is firm, the Assignment Amount is released and commission is payable. This option makes sense if the project is well under way and committed by the developer.

Option C – The middle ground. Once the deal is firm, the Assignor gets back their deposit. The balance of the Assignment Amount is held in trust and released to the Assignor upon completion (and commission is payable at this time). If the transfer of the property at the Land Title Office does not happen by the latest date specified in the Contract, the Assignee at their option, may terminate the Assignment Agreement and have the Assignment Amount released to them

Assignment contract Q&A

Since the latest standard forms were released, several questions have been raised. These answers were provided by Ed Wilson, of Lawson Lundell LLP, who donated more than 60 pro-bono hours on this project. Ed has been the Canadian Bar Association ,BC Branch’s representative on BCREA’s Standard Forms Committee for the past ten years.

Q. Why do Clause 5.16 of the new Assignment of Contract of Purchase andSale(ACPS) (New Development) and Clause 4.13 of the ACPS (Non-Developer) provide that the Assignor will pay GST?

A.That section provides:

GST:The Assignment Amount is inclusive of any GST payable with respect to the Assignment Agreement,and the Assignor shall remit any GST payable.

Clauses 5.16 and 4.13 address the GST payable under the ACPS—not the GST payable under the original Contract of Purchase andSale. When an assignee assigns a Contract and charges an Assignment Amount (the“profit”or“flip fee”), GST may be payable on the Assignment Amount.

Whether GST is payable on the Assignment Amount largely depends on the nature and intention of the Assignor. If this is an isolated transaction, and the Assignor entered into the Contract of Purchase andSaleintending to close on the transaction,the Assignment Amount is probably not subject to GST. If the Assignor entered into the Contract with the intention to flip the Contract,then the Assignment Amount is subject to GST.

Since whether the Assignment Amount is subject to GST depends on the nature and intention of the Assignor,the ACPS is structured to provide that the Assignment Amount includes GST. If the ACPS is subject to GST,the Assignor will have to remit the GST. For example, an Assignment Amount of $50,000 includes GST of approximately $3,000,so the“profit”is $47,000. If not subject to GST,the entire $50,000 is profit.

In any event,the Assignee has paid to the Assignor GST payable and,under the Excise Tax Act,the Assignor is responsible to remit the GST to the Canada Revenue Agency. As the Assignee has paid the GST to the Assignor (who is liable to remit it to the Canada Revenue Agency),the Assignee has no further liability with respect to the GST.

Q. Who remits the GST?

A.If the assignment is subject to GST,except in certain uncommon situations,the Assignor will have to remit the GST to the Canada Revenue Agency. Therefore, any Assignor has to consider whether the assignment is subject to GST and they should get legal or accounting advice in this regard (see Clause 5.22 (New Development) and Clause 4.19 (Non-Developer). If the assignment is subject to GST, the Assignor (or their legal or accounting advisors,if so retained) will have to complete the appropriate forms and remit the GST to the Canada Revenue Agency.

If the assignment is not subject to GST,then there is no GST to remit and no form to complete.

If the Assignor wants to net a specific amount from an assignment that is subject to GST,they will have to ensure that the Assignment Amount includes a sum to cover the GST. For example,if the Assignor wants to net $50,000 after paying the GST,the Assignment Amount will have to be increased to $53,000.

It should be noted that Clauses 5.16 and 4.13 have nothing to do with the GST under the original Contract. If the Contract is for a new home,that Contract is subject to GST,which is paid on closing. The GST under that Contract is forwarded to the developer on closing and the developer remits the GST to the Canada Revenue Agency.

Q. Shouldn’t Clause 5.2 of the ACPS (New Development),which provides that the Deposit will be held in trust pursuant to the Real Estate Services Act (RESA),instead refer to the Real Estate Development Marketing Act (REDMA),since it deals with deposits that relate to projects over five units?

A.The Deposit referred to in Clause 5.2 is the Deposit under the Assignment Agreement,not the deposit under the Contract. For example, a Contract to buy a $500,000 unit could provide that the deposit of $50,000 is to be paid to a lawyer in trust. Depending on the nature of the project,it may be subject to REDMA,in which case the lawyer would hold the deposit on behalf of the developer subject to the terms of REDMA. If the deposit was paid to a REALTOR®,the REALTOR&! reg; would hold it subject to the provisions of REDMA,but also subject to the provisions of RESA (i.e.,as a stakeholder).

In the case of the deposit with respect to the Assignment (e.g.,the Assignment Amount is $100,000,but a deposit of $10,000 is paid until the Assignee removes his subject when he increased it to the full $100,000),the REALTOR® would hold that deposit pursuant to RESA (i.e.,as a stakeholder),not pursuant to REDMA.

Q. What is a deposit (protection) contract?

A.The“Deposit PROTECTION Contract”referred to in Clause 2 of the ACPS (New Development) is provided for under REDMA (see s. 19(1)). It allows the developer to make use of the deposits placed by purchasers in new projects.

Under REDMA,the deposit normally must be held by a lawyer,notary or REALTOR® until titles are raised (see s. 18(1) of REDMA). However,if a deposit protection contract is in place,the deposits may be released to the developer to fund the construction.

A deposit protection contract is a contract between the developer and an insurance company,wherein the insurance company agrees to refund the deposits to the purchasers if the developer fails to complete the project. The deposits are paid as usual into a lawyer’s or REALTOR®’s trust account,and the insurance company issues a policy in favour of the original purchaser. As construction proceeds,the lawyer or REALTOR® holding the deposit is authorized by the insurance company to release ! portions of the deposits in draws to the developer to fund construction. This significantly reduces the developer’s cost of borrowing.

If the original Contract is assigned as contemplated by the ACPS,the insurance company will insist on having a release signed by the original purchaser and the developer,stating that the original purchaser releases the insurance company of all liability under the deposit protection policy and they have assigned their interest in the deposit monies to the Assignee. If the insurance company does not get the release,the closings may be held up.

The question (“Is a deposit protection contract in place?”) is asked on the ACPS to flag the issue for the parties. If the answer is yes,the REALTOR® should get the form of release from the insurance company (the name of the insurance company will be in the REDMA Disclosure Statement),so the REALTOR® can have it signed when the ACPS is firm.

The B.C. office of the superintendent of Real Estate has issued an updated information bulletin for those buying assignments for a new condo or other residential property.

The alert is provided to consumers for information purposes only. It is important for purchasers to obtain appropriate professional real esate and legal advice prior to entering into an assignment agreement.

Things to consider before buying an assignment:

– Consider whether an assignment is permitted under the purchase contract. Some developers do not permit assignments. Others may require the developer’s consent and a substantial assignment fee;

– Review the developer’s Disclosure Statement and thoroughly review all documents related to the sale;

– Obtain advice from a lawyer and/or real estate professional prior to entering into an assignment contract;

– Consider all your options, such as whether the deposit and “lift” will be paid to the assignor upon signing the agreement or held in trust until some later date. Generally, it is preferable from the assignee’s perspective if money is released to the assignor only after the unit is built and title is being transferred; and

– Confirm in the assignment agreement how the assignor will meet all of the requirements for a valid assignment, and set out what will happen if there is ony breach of the assignment agreement or the pre-sale contract.

For further information on real estate transactions and contact information for government offices and industry associations, visit www.fic.gov.bc.ca; or the Homeowner Protection Office website at www.hpo.bc.ca.

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